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Risk measures and portfolio analysis in the paradigm of climate finance: a review

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  • Siddhartha P. Chakrabarty

    (Indian Institute of Technology Guwahati)

  • Suryadeepto Nag

    (Indian Institute of Science Education and Research Pune)

Abstract

Climate change brings with it new risks for the finance sector, which in turn provides new opportunities to mitigate this risk, emanating from climate change. To invest sustainably and move away from firms that have disproportionately high carbon footprints, investors need suitable risk measures and appropriate portfolio management approaches. In this paper, we conduct a review of the mathematical models used to measure carbon risk. Subsequently, we review portfolio optimization models based on modern portfolio theory and the incorporation of risk measures into portfolio optimization strategies. We find that there is a lack of consensus about the existence of a carbon premium or an equity greenium in stock prices. We also find that the literature on portfolio optimization techniques is comparatively nascent.

Suggested Citation

  • Siddhartha P. Chakrabarty & Suryadeepto Nag, 2023. "Risk measures and portfolio analysis in the paradigm of climate finance: a review," SN Business & Economics, Springer, vol. 3(3), pages 1-22, March.
    • Handle: RePEc:spr:snbeco:v:3:y:2023:i:3:d:10.1007_s43546-023-00449-w
    DOI: 10.1007/s43546-023-00449-w
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    Cited by:

    1. Namasi G. Sankar & Suryadeepto Nag & Siddhartha P. Chakrabarty & Sankarshan Basu, 2024. "The Carbon Premium: Correlation or Causation? Evidence from S&P 500 Companies," Papers 2401.16455, arXiv.org.

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    More about this item

    Keywords

    Carbon premium; Carbon risk; Climate finance; Climate risk; Portfolio optimization;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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